July 7 (Bloomberg) -- Sweden’s surprise interest-rate cut last week will probably prompt a Norges Bank response to shield the economy from a strengthening currency, according to DNB ASA, Norway’s biggest lender.
Policy makers in Oslo now have to contend with record low rates in Sweden and in the euro area, the nation’s top trading partners, after the Riksbank lowered its benchmark to 0.25 percent on July 3, matching an all-time low. The European Central Bank reduced borrowing costs a month earlier, with both pledging to keep policy loose for a long time.
“It increases the pressure on Norges Bank to be more expansive in their monetary policy either by cutting or by keeping the rate low for longer,” Kjersti Haugland, an analyst at DNB, said in a July 4 interview.
The central bank in western Europe’s largest oil producer signaled last month that it may also lower rates as it seeks to strike a balance between supporting growth and limiting krone strength. Policy makers kept the deposit rate at 1.5 percent on June 19, and pushed back the timing of tightening until the end of 2015, from a previous estimate of mid-year.
Norges Bank said then that a further weakening of the economy may warrant a rate cut as it seeks to protect Scandinavia’s richest nation from a drop in oil investment.
Bets on rate cuts increased last week. Three-month forward-rate agreements maturing in December 2014 fell about five basis points to 1.64 percent. The contract settles to the Norwegian interbank offered rate, which was at 1.72 percent.
The krone is down about 3 percent against the euro following the bank’s June 19 decision. After the Swedish krona, it’s the worst performer this year among 10 major currencies tracked by Bloomberg Correlation-Weighted indexes.
That may be enough to keep them from cutting, as the weak exchange rate will also boost inflation, according to Nordea Bank AB, the largest Nordic lender.
“With the krone as weak as it is now we don’t see the risk of Norges Bank cutting rates,” said Joachim Bernhardsen, an analyst at Nordea. While the Riksbank’s decision may delay Norway’s first increase, inflation that is faster than the central bank’s forecast offsets a risk for a cut, he said.
The $500 billion economy, home to Statoil ASA, is slowing as a drop in oil investments threatens to halt a boom in investments in Norway’s petroleum-rich economy. Norges Bank predicts oil companies operating in Norway will cut investment by 10 percent next year, which is more optimistic than a survey from Norway’s statistics agency that showed that oil companies may reduce investment by as much as 21 percent.
Olsen’s warning last month reprises a similar move in June last year, when the bank also signaled a cut may come. Policy makers then in September last year reversed course, after successfully capping the krone, and said they will need to raise rates sooner than predicted. That call also came to naught as the bank was again forced to back down on plans as housing prices tumbled faster than estimated.
While growth is forecast to slow for a second year, house prices in 2014 have reversed a 6 percent drop seen in the last seven months of last year. Credit growth rose 5.5 percent in May from a year earlier, the slowest since October 2010, according to Statistics Norway.
Norges Bank last month played down risks stemming from household debt.
“We’re definitely doing some thinking regarding our own estimates for Norges Bank’s interest rate setting,” Haugland said. “This is especially after the outcome of the Riksbank meeting.”
To contact the reporter on this story: Saleha Mohsin in Oslo at firstname.lastname@example.org